Equity markets spent most of yesterday on the back foot over US House Speaker Nancy Pelosi’s trip to Taiwan which prompted a counter response from China, in the form of the announcement of drills and live fire military exercises in the Taiwan Straits over the next two days.
US markets also struggled for gains as treasury yields rebounded strongly after a succession of Fed Presidents pushed back on the idea that the Fed was about to go soft on further aggressive rate rises.
This soft finish in the US and a cautious Asia session looks set to translate into a slightly weaker European open.
Earlier this week we saw economic activity in the manufacturing sector slide back into contraction territory for all four of Europe’s biggest economies, as higher energy prices and supply chain disruption sapped confidence across the region.
This trend is expected to be replicated in today’s services PMIs although we can expect economic activity in Spain and Italy to be slightly more resilient given how well the tourism sector was able to boost Q2 GDP in data released at the end of last week. The French economy has also been helped by the tourism boost, with all three expected to see economic activity in services remain in expansion territory. Spain is expected to slow to 52, Italy to 50.1 and France 52.1.
Germany is expected to be the exception to this rule with if the recent flash numbers are any guide slipping back to 49.2 from 52 in June.
The UK economy has managed to hold up well, despite the challenges posed by rising prices, but even here there could well be a tourism boost at play, with July services activity set to slow modestly from 54.3 to 53.3.
The US also saw a sharp slide into contraction territory in the most recent flash PMI numbers to 47 and a two year low. This was truly a shocking number and has raised concerns that the US economy could well be slowing sharply. Investors will be looking to see if the ISM services report shows similar weakness. There is also a concern that the resilience of the jobs market could be disguising a deeper slowdown, as well as a general lack of consumer confidence.
The deterioration in the economic numbers, along with Powell’s neutral range comments last week, has caused steep decline in yields over the past few days, as markets shift towards the idea of a Fed pivot. This interpretation did receive short shrift yesterday from the likes of Mary Daly of the San Francisco Fed, Loretta Mester of the Cleveland Fed and Charles Evans of the Chicago Fed. All three peddled the same line that the Fed’s work on inflation was nowhere near done, with all three saying that they wanted to see clear evidence of falling core and headline inflation before slowing the pace of rate rises, pulling yields off their lows of the day, and keeping a lid on equity markets.
EUR/USD – a slight spill over the 1.0275 area soon ran out of steam just below the 1.0300 level before sliding back. While below the bigger resistance at 1.0350, the risk remains for a move back towards parity, and the previous lows at 0.9950. A move below 0.9950, towards 0.9660.
GBP/USD – has slipped back from the 1.2300 area with support coming in at the 1.2100 area, which is trend line support from the recent lows at 1.1760. If this holds then the current uptrend should remain intact. A break below 1.2080 signals a move back to the 1.1980 area.
EUR/GBP – set to remain under pressure, while below resistance at the 0.8420 area, with the April lows at 0.8280 the next key support. A move through the 0.8430 level targets a move back towards 0.8480. While below the 0.8430 area, momentum remains negative for a move towards the 0.8300 area.
USD/JPY – dipped down to 130.40 before rebounding strongly. The bias remains lower having broken below the 50-day SMA. Resistance now comes in at the 134.80 level.